Nine alcohol and drug rehabilitation centers claim that the health insurance company Health Net of Arizona improperly withheld or delayed lucrative payments for treatment of people struggling with addiction(Photo: Getty Images)

The only "Obamacare" health insurer in metro Phoenix and Pima County is ensnared in a legal dispute with several addiction treatment centers over the cost of care amid an Arizona opioid epidemic that is taking an average of two lives each day.

Nine alcohol and drug rehabilitation centers claim in a Maricopa County Superior Court lawsuit that the health insurance company Health Net of Arizona improperly withheld or delayed lucrative payments for treatment of people struggling with addiction.

But Health Net says in a counterclaim that there was widespread fraud among Arizona and California drug rehab centers in 2015 and 2016, when it alleges"teams of brokers" recruited out-of-state clients to fraudulently obtain insurance policies and to seek treatment in Arizona.

Those actions have cost the insurance company — and Arizona consumers through higher monthly premiums — tens of millions of dollars, the Health Net counterclaim says.

The lawsuit reveals the financial engine of a booming rehab industry that has fed the growth of facilities aiming to get and keep people off alcohol and drugs such as opioids and heroin.

The growth of rehab centers corresponds with the rise of residential “sober homes” that have sprouted in upscale neighborhoods of Phoenix, Paradise Valley, Scottsdale and other communities in metro Phoenix.

The proliferation of these homes pits residential neighbors against rehab entrepreneurs in standoffs that have created headaches for local government officials as they try to determine how to manage the unregulated industry.

Prescott, which once claimed more than 100 sober homes, has adopted regulations to provide more oversight of them.

“Health Net's PPO plans paid $2.4 million to all Arizona rehab centers in 2014. Those payments soared to $47.4 million in 2015.”

Health Net counterclaim

The sober homes provide a safe haven for people trying to overcome drug or alcohol addictions. These homes generally do not provide treatment, but people living in them often seek outpatient treatment from affiliated rehabilitation clinics.

Arizona's rehabilitation industry has caught the attention of regulators in other states.

The Massachusetts attorney general this year warned consumers to be wary of solicitations to enter rehab in Arizona, Florida and California. Federal and state prosecutors have aggressively pursued cases in Florida and California in connection with fraudulent activities such as patient brokering.

The rehab facilities allege that Health Net improperly withheld payments to virtually every rehab center in Arizona and southern California beginning in January 2016. Health Net halted the payments as part of an investigative audit that demanded each center provide detailed records such as proof of patients' residency and assurances that patients did not receive incentives to sign up for rehab.

Health Net did not resume making payments until May 2016, the lawsuit states. By then, the rehab centers were financially squeezed and even had to turn away Health Net-insured clients.

"We've had treatment centers that have had to close their doors due the lack of payments," said John Flynn, a Phoenix attorney who represents Arizona and California rehab facilities in separate lawsuits filed in each state. "Patients were sent away because they could not (afford to) address their needs."

The Arizona lawsuit also claims that Health Net issued inaccurate financial statements in late 2015 and early 2016 because it did not report an estimated $150 million in claim payments owed to the rehab centers. Health Net was acquired by St. Louis-based Centene Corp., which later restated the financial statements to reflect the claim payments, the lawsuit stated.

A California lawsuit filed by multiple rehab businesses, including Shreya Health of Arizona and Sovereign Health of Arizona, claims Health Net refused to pay $55 million in medically necessary services. Shreya Health and Sovereign Health both have facilities in Chandler.

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Soaring claims

Health Net said in court documents that claims filed by rehab centers in Arizona soared becauseof widespread fraud. Health Net representatives, citing ongoing litigation, would not discuss the case with The Arizona Republic.

However, Health Net said in a counterclaim that the fraud involved Health Net's "preferred provider," or PPO, plans that paid benefits to rehab centers that were not part of the insurer's network.

In-network providers typically agree to offer services at negotiated discounted rates, and consumers typically pay less out of pocket for in-network claims. But consumers typically have to pay a larger share of the bill from out-of-network providers, which are not obligated to charge negotiated, discounted rates.

Health Net's PPO plans paid $2.4 million to all Arizona rehab centers in 2014. Those payments soared to $47.4 million in 2015. Those plans paid more for rehab care that year than all other types of care in Arizona, including typically expensive medical care such as cancer, heart disease and child births, according to the insurer’s counterclaim.

Those higher insurance costs, which Health Net alleges resulted from fraud, are collectively paid by all customers in the form of higher premiums, the insurer said in court filings.

The nine centers that Health Net sued in its counterclaim had collectively billed the insurer $28 million from January 2015 through September 2016, the lawsuit stated.

Here’s how the fraud worked, the insurer said in its counterclaim:

Brokers would scout out people in 12-step programs, Alcoholics Anonymous meetings, homeless shelters and jails, then refer these clients to the “highest-bidding clinic.”

Clinics that were not part of the insurer’s network paid clients’ insurance premiums and out-of-pocket costs such as deductibles and co-payments.

The result was that people secured Health Net coverage “arranged and bought for them by financially-interested providers for one purpose only: to obtain coverage for the limited time needed to rack up millions of dollars in substance abuse treatment.”

Some clinics misrepresented the home addresses of patients, many of whom lived out of state.

Health Net said that the Arizona centers, and others, engaged in “a sophisticated fraud involving the fraudulent enrollment of non-Arizona residents,” who signed up for Arizona insurance policies.

Even though “many, if not most” prospective clients lived out of state, they were signed up for Health Net PPO plans for Arizona residents, often misrepresenting their home address on applications, according to the counterclaim.

The insurer described examples of two New York residents enrolled in a Health Net plan and encouraged to get treatment at Clean Adventures of Sober Living in Prescott.

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One New York patient, identified as M.B., reportedly told a Health Net investigator that a Clean Adventures staff member told him to list the rehab facility's address on his insurance application.

A second New York patient, identified as J.S., told an investigator a Clean Adventures staffer put him in contact with an insurance agent who suggested using Clean Adventures' address on his insurance application, the counterclaim stated.

The insurer named 10 other examples of people who lived in California, Indiana, New Jersey, New York, Tennessee and Wisconsin but represented that they lived in Prescott or Scottsdale. The insurer did not identify which rehab centers those individuals used, but said they were among the nine rehab centers in the counterclaim.

Health Net said that the treatment centers often purchased and paid for the insurance policies but did not disclose this to patients, who were often told they were eligible for a "scholarship program" that covered rehab costs.

The insurer also said the rehab centers engaged in fraudulent billing, charging for services that were not medically necessary or in amounts that exceeded what the plan allowed.

Health Net said the centers inflated the bills so they could collect from the insurer costs that should have been paid by consumers, such as co-payments and coinsurance.

The counterclaim also says the nine Arizona centers billed Health Net less than $56,000 in January 2015. However, during a one-year period through July 2016, those substance-abuse facilities billed Health Net more than $12.5 million.

The counterclaim asks the court to award damages in an amount to be proven at trial and to order the centers to cease engaging in those business practices.

The rehab centers deny any wrongdoing in an answer to the counterclaim.

Flynn noted that the case is in discovery. He said his team has yet to receive all documentation requested from Health Net, including documents supporting allegations listed in the counterclaim.

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Confluence of laws

Arizona rehab industry officials said it appears a small number of rehab centers took financial advantage of a confluence of federal laws.

A 2008 law called the Mental Health Parity and Addiction Act requires insurance plans to provide equitable coverage for substance abuse and addiction treatment. The Affordable Care Act also requires health insurance plans cover essential health benefits, including behavioral health services, and it forbids insurers from denying coverage to individuals based on existing medical conditions.

"The unintended consequence was (some) addiction treatments centers began taking advantage of that and over-billing," said Angie Geren, executive director of Addiction Haven, a grassroots and advocacy organization focusing on addiction issues.

Geren said that while the vast majority of Arizona centers have not engaged in such activity, the state's reputation has been harmed by the actions of those that did.

Massachusetts Attorney General Maura Healy earlier this year warned that her office received reports of individuals trying to recruit people to "so-called treatment centers in Arizona, California or Florida."

Healy warned residents to be wary of addiction-treatment centers that arrange out-of-state travel or offer to cover insurance payments. Individuals who arrange for addiction treatment may be getting payments from the rehab centers they are recruiting for.

Massachusetts has a law that prohibits the receipt of payments or kickbacks for referring a patient to treatment.

Noel Campbell(Photo: Special for The Republic)

Arizona Rep. Noel Campbell, R-Prescott, earlier this year introduced House Bill 2333 that sought to curb the practice of paying referral fees to brokers who steer patients to rehab centers.

Under Campbell's bill, referrals of more than $1,000 would have triggered a Class 3 felony charge with a possible penalty of 3.5 years in prison. However, the bill never made it out of committee.

Dave Aronberg, the state attorney for Palm Beach County, Fla., said law enforcement there has arrested 41 individuals. The most common charge involved violation of the state's patient-brokering law, he said

"The scam starts with deceptive advertising at the beginning," Aronberg said. "You are lured down to sunny Florida with a free plane ticket, which is illegal. You are given illegal benefits to keep you there."

But Aronberg said patients often find themselves booted from treatment when their insurance benefits run out. That creates an incentive for people to relapse so they can obtain another round of coverage.

Aronberg's office has started a Sober Home Task Force targeting the practice of buying and selling patients battling addiction. His office also has received leads and information about similar activity in other states, including Arizona and California, particularly Orange County.

Dave Aronberg, the state attorney for Palm Beach County, Fla., said law enforcement there has arrested 41 individuals after the state enacted "patient-brokering" laws aimed at eliminating such activity at rehab homes there.(Photo: Bill Ingram, AP)

Alan Johnson, a Palm Beach County chief assistant state attorney who oversees the county's sober-home task force, said sober homes have sprouted in communities there. These homes provide out-of-state patients a place to live while they undergo drug treatment.

A key funding source for the rehab centers, which often work in tandem with sober homes, has been urinalysis testing. These tests, for which the centers charged large and repetitive fees, proved lucrative from 2014 through 2016. However, insurers are beginning to scrutinize payments for such tests more closely.